Opinion
G051576
12-29-2016
GEORGES ROUDANEZ, as Trustee, etc., et al., Plaintiffs and Appellants, v. COLTON REAL ESTATE GROUP, et al., Defendants and Respondents.
Callahan & Blaine, Daniel J. Callahan, Michael J. Sachs, Jill A. Thomas, Paul M. Torres; Cadden & Fuller, Thomas H. Cadden and John Taylor for Plaintiffs and Appellants. Weintraub Tobin, Gary A. Waldron, Jacob C. Gonzales, Corbett H. Williams; O'Melveny & Myers, Michael G. Yoder, Stephanie L. Noble, Adam Levine and Jennifer Middleton for Defendants and Respondents.
NOT TO BE PUBLISHED IN OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115. (Super. Ct. No. 30-2011-00502285) OPINION Appeal from a judgment of the Superior Court of Orange County, Robert J. Moss, Judge. Motion for judicial notice denied. Affirmed in part and reversed in part. Callahan & Blaine, Daniel J. Callahan, Michael J. Sachs, Jill A. Thomas, Paul M. Torres; Cadden & Fuller, Thomas H. Cadden and John Taylor for Plaintiffs and Appellants. Weintraub Tobin, Gary A. Waldron, Jacob C. Gonzales, Corbett H. Williams; O'Melveny & Myers, Michael G. Yoder, Stephanie L. Noble, Adam Levine and Jennifer Middleton for Defendants and Respondents.
* * *
The Provider Fund is a limited partnership that owns and manages commercial real properties in Orange County, California. Plaintiffs and appellants (collectively, Plaintiffs) are limited partner investors who brought this derivative lawsuit on the Provider Fund's behalf and against its general partner, Colton Real Estate Group, doing business as the Colton Company (Colton Company), and also Colton Capital Corporation, Colton Properties, Inc., David A. Colton (Colton), individually and as Trustee of the Colton Family Trust, Jon W. McClintock, and Linda Colton (collectively, Defendants). Plaintiffs allege Colton and McClintock own and control the Colton Company and the other entity Defendants, and all Defendants aided and abetted or otherwise worked together to damage the Provider Fund in different ways. On the Provider Fund's behalf, Plaintiffs allege claims for breach of fiduciary duty, unfair competition in violation of Business and Professions Code section 17200 et seq., accounting, and declaratory relief.
Plaintiffs are Georges Roudanez, as Trustee of the Roudanez Family Trust dated November 1991, Robert H. Odell, Jr., and Richard Otto Wahlgren, as Trustee of the Richard Otto Wahlgren Trust dated 11/15/79.
All statutory references are to the Business and Professions Code unless otherwise stated.
The trial court entered judgment against Plaintiffs after sustaining Defendants' demurrer to the complaint without leave to amend. The court concluded Plaintiffs lacked standing to bring this derivative lawsuit because they failed to allege that either they complied with the prefiling demand requirement that applies in all derivative lawsuits, or particularized facts showing it would have been futile to make a prefiling demand on Defendants. The court also concluded Plaintiffs failed to allege sufficient facts to state a cause of action against any Defendant other than the Colton Company.
We conclude the trial court erred in concluding Plaintiffs lacked standing to bring this derivative lawsuit. Both sides mistakenly focus on whether Plaintiffs alleged facts showing it would have been futile for Plaintiffs to make a prefiling demand on Colton and McClintock, asking them to direct the Provider Fund to bring this lawsuit. The statute establishing the prefiling demand requirement and the futility exception provides that the prefiling demand must be made on a limited partnership's general partner because the general partner possesses the exclusive authority to manage the partnership's business, including deciding whether to initiate litigation.
Here, the Colton Company is the Provider Fund's only general partner, not Colton or McClintock. Plaintiffs alleged facts showing the Colton Company caused the Provider Fund to pay numerous real estate and leasing commissions to Colton Capital that were not authorized by the Provider Fund's governing documents, and also alleged facts showing Colton Capital had the identical ownership and management as the Colton Company. These factual allegations created a reasonable doubt about whether the Colton Company had the necessary independence and objectivity to evaluate those transactions and the need for this litigation. As explained below, that doubt establishes demand futility under the governing standards.
The trial court, however, correctly determined Plaintiffs failed to state a breach of fiduciary duty claim against any Defendant other than the Colton Company. Plaintiffs failed to allege facts establishing that any other Defendant owed the Provider Fund fiduciary duties, or that any other Defendant could be held liable for the Colton Company's breach of its duties. The court also correctly sustained the demurrer on the unfair competition claim because Plaintiffs failed to allege facts showing Defendants engaged in an unlawful, fraudulent, or unfair business practice or act within the meaning of section 17200 et seq. We also agree that Plaintiffs failed to state an accounting or declaratory relief claim against any Defendant other than the Colton Company. Finally, we conclude the court did not err in denying Plaintiffs leave to amend because they failed to identify any additional facts they could allege to overcome the foregoing defects.
Accordingly, we reverse in part and affirm in part.
I
FACTS AND PROCEDURAL HISTORY
Defendants are in the business of purchasing and managing commercial real properties. During the 1990's and early 2000's, they created several "funds" to solicit investors and take title to each portfolio of commercial office buildings they purchased. During this period, Defendants formed the Provider Fund as a limited partnership, and it now holds title to and manages 13 properties in Orange County.
The Provider Fund has two types of investors. Share investors purchased a passive ownership interest in the fund itself and became limited partners; they do not hold title to any of the properties the fund owns and they have no right to participate in managing the properties. Other investors purchased tenant in common interests in one or more of the individual properties that make up the fund; they have no ownership interest in the fund itself and are not limited partners. Instead, tenant in common investors hold an ownership interest in specific properties along with the fund itself, but they have no right to participate in managing the properties. Plaintiffs are share investors, and therefore limited partners in the Provider Fund.
The Colton Company is a corporation and the Provider Fund's sole general partner with the exclusive authority to manage the fund and its properties. Colton is the chief executive officer and sole director and shareholder of the Colton Company. McClintock is the Colton Company's chief financial officer. Under the terms of the Provider Fund, the Colton Company was supposed to manage the properties the fund purchased, but the Colton Company contracted with Colton Capital to perform part of that function. As with the Colton Company, Colton is the chief executive officer and sole director and shareholder of Colton Capital, and McClintock is the corporation's chief financial officer. Colton Properties also is a corporation for which Colton is the chief executive officer and sole director and shareholder. Linda Colton is Colton's former wife. She previously was an officer, director, and shareholder of the Colton Company, Colton Capital, and Colton Properties, but she relinquished ownership and control of these entities when she divorced Colton in October 2009. The Colton Family Trust is a trust Colton and Linda Colton formed while they were married; he now serves as the trust's sole trustee.
In 2011, Plaintiffs filed this derivative lawsuit to recover for injuries to the Provider Fund caused by Defendants' alleged mismanagement, self-dealing, and other miscellaneous misdeeds. After the trial court sustained several demurrers with leave to amend, the operative pleading is the third amended complaint. In addition to Defendants, Plaintiffs also named the Provider Fund as a nominal defendant because they brought this action on the partnership's behalf without the consent of the Colton Company as the Provider Fund's general partner. The third amended complaint alleges claims against Defendants for breach of fiduciary duty, unfair business practices in violation of section 17200 et seq., accounting, and declaratory relief. Plaintiffs do not assert a direct claim in their own name to recover for injuries they suffered distinct from the injuries the partnership suffered as a whole.
Plaintiffs alleged Defendants formed and managed the Provider Fund as part of a complex scheme to defraud investors. According to Plaintiffs, to solicit investors the Colton Company issued a private placement memorandum that represented the fund's purpose was to purchase income producing properties, hold the properties for five to seven years depending on market conditions, and then sell the properties and distribute the profits among the partners. More than twenty years after its formation, however, the Provider Fund continues to own all of the purchased properties. Plaintiffs also alleged Defendants' mismanagement of the Provider Fund and its properties economically harmed its investors and forced them to sell their interests in the fund and its properties to Defendants at well below market value. For example, Defendants forced investors to pay taxes on the Provider Fund's undistributed profits without providing the investors the funds needed to pay those taxes.
Plaintiffs further allege Defendants have conducted unauthorized transactions and engaged in other conduct that violated the terms of the Provider Fund's governing documents and enriched themselves at the expense of the fund and its investors. For example, Plaintiffs alleged Defendants caused the Provider Fund to pay Colton Capital unauthorized and excessive deferred real estate commissions as compensation for identifying and negotiating the purchase of the Provider Fund properties. Similarly, Plaintiffs alleged Defendants caused the Provider Fund to pay Colton Capital leasing commissions that greatly exceeded the commissions the fund's governing documents authorized for identifying and securing tenants. Plaintiffs also alleged Defendants violated the Provider Fund's first refusal rights to repurchase the interests of both share and tenant in common investors by purchasing interests in their own name for well below market value after placing those investors in economic distress, as described above. Plaintiffs alleged Defendants committed other misdeeds in managing the Provider Fund, including borrowing money from the Colton Family Trust at higher than market interest rates, paying for Defendants' personal legal fees with Provider Fund moneys, paying unauthorized or excess fees and expenses, failing to maintain proper accounting records, destroying various accounting records, and improperly transferring funds to and from other investment funds Defendants operated.
According to Plaintiffs, the Colton Company is liable for these misdeeds because it is the Provider Fund's general partner responsible for its operations, and the other Defendants are liable because they are fiduciaries of the Colton Company and otherwise participated in, aided and abetted, or conspired to commit these transgressions. Plaintiffs also allege Defendants are alter egos of one another. Finally, Plaintiffs allege they were excused from making a prefiling demand on Defendants because Defendants owned and controlled one another, and were interested and participated in the alleged illegal conduct. According to Plaintiffs, it would have been futile to demand that Defendants direct the Provider Fund to bring this lawsuit against Defendants.
Defendants' demurred to the third amended complaint and each of its causes of action, arguing Plaintiffs failed to allege the specific facts necessary to establish a prefiling demand on Defendants would have been futile. They also argued the second cause of action for unfair competition failed to allege sufficient facts to state a claim against any Defendant, and the other three causes of action failed to allege sufficient facts to state a claim against any Defendant other than the Colton Company. The trial court agreed and sustained the demurrer without leave to amend. After the trial court entered judgment for Defendants, Plaintiffs filed this appeal.
II
DISCUSSION
A. Standard of Review
"We review the ruling sustaining the demurrer de novo, exercising independent judgment as to whether the complaint states a cause of action as a matter of law." (Kan v. Guild Mortgage Co. (2014) 230 Cal.App.4th 736, 740.) "'[W]e give the complaint a reasonable interpretation, reading it as a whole and its parts in their context.'" (Moran v. Prime Healthcare Management, Inc. (2016) 3 Cal.App.5th 1131, 1139.) "We assume the truth of the properly pleaded factual allegations, facts that reasonably can be inferred from those expressly pleaded and matters of which judicial notice has been taken" (Gilkyson v. Disney Enterprises, Inc. (2016) 244 Cal.App.4th 1336, 1340), "'but do not assume the truth of contentions, deductions or conclusions of law'" (Esparza v. Kaweah Delta Dist. Hospital (2016) 3 Cal.App.5th 547, 552).
"'Whether the plaintiff will be able to prove these allegations is not relevant; our focus is on the legal sufficiency of the complaint.'" (Debrunner v. Deutsche Bank National Trust Co. (2012) 204 Cal.App.4th 433, 438-439.) We are not bound by the trial court's construction of the complaint (Crawley v. Alameda County Waste Management Authority (2015) 243 Cal.App.4th 396, 403), and we do not review the validity of the trial court's reasoning (Orcilla v. Big Sur, Inc. (2016) 244 Cal.App.4th 982, 994).
Although we review the complaint de novo, "'[t]he plaintiff has the burden of showing that the facts pleaded are sufficient to establish every element of the cause of action and overcoming all of the legal grounds on which the trial court sustained the demurrer, and if the defendant negates any essential element, we will affirm the order sustaining the demurrer as to the cause of action. [Citation.] We will affirm if there is any ground on which the demurrer can properly be sustained, whether or not the trial court relied on proper grounds or the defendant asserted a proper ground in the trial court proceedings.'" (Rossberg v. Bank of America, N.A. (2013) 219 Cal.App.4th 1481, 1490-1491 (Rossberg).)
"'When a demurrer is sustained without leave to amend, the reviewing court must determine whether there is a reasonable probability that the complaint could have been amended to cure the defect . . . .' [Citation.] The abuse of discretion standard governs our review of that question. [Citation.] 'The plaintiff bears the burden of proving there is a reasonable possibility of amendment.' [Citation.] To satisfy that burden, the plaintiff '"must show in what manner he can amend his complaint and how that amendment will change the legal effect of his pleading." [Citation.] The assertion of an abstract right to amend does not satisfy this burden. [Citation.] The plaintiff must clearly and specifically set forth the "applicable substantive law" [citation] and the legal basis for amendment, i.e., the elements of the cause of action and authority for it. Further, the plaintiff must set forth factual allegations that sufficiently state all required elements of that cause of action. [Citations.] . . . [¶] The burden of showing that a reasonable possibility exists that amendment can cure the defects remains with the plaintiff; neither the trial court nor this court will rewrite a complaint. [Citation.] Where the appellant offers no allegations to support the possibility of amendment and no legal authority showing the viability of new causes of action, there is no basis for finding the trial court abused its discretion when it sustained the demurrer without leave to amend. [Citations.]'" (Rosen v. St. Joseph Hospital of Orange County (2011) 193 Cal.App.4th 453, 458 (Rosen).) B. Plaintiffs Alleged Sufficient Facts to Establish the Futility of Making a Prefiling Demand on the Colton Company
1. Governing Legal Principles on Derivative Lawsuits and Demand Futility
As a limited partnership, the Provider Fund "is an entity distinct from its partners." (Corp. Code, § 15901.04, subd. (a).) It has "the power to sue, be sued, and defend in its own name[,] and to maintain an action against a partner for harm caused to the limited partnership by a breach of the partnership agreement or violation of a duty to the partnership." (Id. at § 15901.05.)
Like a corporation's shareholders, a partnership's limited partners may bring two types of lawsuits concerning the entity's affairs. (See Schuster v. Gardner (2005) 127 Cal.App.4th 305, 311-312, 317; Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411, 425-428 [applying test for identifying types of shareholder suits to lawsuits by limited partners].) First, "a partner may maintain a direct action against the limited partnership or another partner for legal or equitable relief . . . to enforce the rights and otherwise protect the interests of the partner." (Corp. Code, § 15910.01, subd. (a).) Second, "[a] partner may bring a derivative action to enforce a right of a limited partnership." (Id. at § 15910.02.) "'The purpose of a limited partner's derivative action is to enforce a claim which the limited partnership possesses against others [including the general partners] but which the partnership refuses to enforce. [Citations.] Like a shareholder's derivative action, a limited partner's derivative suit is filed in the name of a limited partner, and the partnership is named as a defendant. Although a limited partner is named as the plaintiff, it is the limited partnership which derives the benefits of the action.'" (Everest Investors, at p. 425.)
Before a limited partner may bring a derivative lawsuit on a partnership's behalf, the limited partner must make a demand on the partnership's general partners to direct the partnership to bring the action, and the general partners must fail to do so within a reasonable time after the demand. (Corp. Code, § 15910.02.) This prefiling demand requirement is excused if a demand would be futile. (Ibid.) The complaint in a derivative action "must state with particularity" either the date and contents of the demand and the general partners' response, or "why demand is excused as futile." (Id. at § 15910.04.)
There is no reported California case applying the prefiling demand requirement or futility exception established by Corporations Code sections 15910.02 and 15910.04, or their predecessor statute (former Corp. Code, § 15702). We therefore turn to the well-established body of law applying the statute imposing the same prefiling demand requirement and exception for derivative lawsuits in the corporate context. (See Corp. Code, § 800, subd. (b)(2) ["No action may be instituted or maintained in right of any domestic or foreign corporation by any holder of shares . . . unless . . . [¶] . . . [¶] The plaintiff alleges in the complaint with particularity plaintiff's efforts to secure from the board such action as plaintiff desires, or the reasons for not making such effort . . ."].)
Derivative suits are "'a limited exception to the usual rule that the proper party to bring a claim on behalf of a corporation is the corporation itself, acting through its directors or the majority of its shareholders.'" (Bader v. Anderson (2009) 179 Cal.App.4th 775, 789 (Bader).) The purpose of the demand requirement and its futility exception "'"is to encourage intracorporate resolution of disputes and to protect the managerial freedom of those to whom the responsibility of running the business is delegated."'" (Id. at pp. 789-790.) "'This "demand requirement" affords the directors an opportunity to exercise their reasonable business judgment and "waive a legal right vested in the corporation in the belief that its best interests will be promoted by not insisting on such right. They may regard the expense of enforcing the right or the furtherance of the general business of the corporation in determining whether to waive or insist upon the right." [Citation.] On the other hand, if, in the view of the directors, "litigation is appropriate, acceptance of the demand places the resources of the corporation, including its information, personnel, funds, and counsel, behind the suit."'" (Id. at p. 789.)
"'Although "jurisdictions differ widely in defining the circumstances under which demand on directors will be excused," [citation], demand typically is deemed futile when a majority of the directors have participated in or approved the alleged wrongdoing, [citation], or are otherwise financially interested in the challenged transactions.'" (Bader, supra, 179 Cal.App.4th at p. 790.) California's statutory requirement that demand futility be alleged with particularity makes "clear that general averments that the directors were involved in a conspiracy or aided and abetted the wrongful acts complained of will not suffice to show demand futility." (Ibid.) "Rather, 'the court must be apprised of facts specific to each director from which it can conclude that that particular director could or could not be expected to fairly evaluate the claims of the shareholder plaintiff.' [Citation.] Thus, the court, in reviewing the allegations to support demand futility, must be able to determine on a director-by-director basis whether or not each possesses independence or disinterest such that he or she may fairly evaluate the challenged transaction." (Ibid.; see Shields v. Singleton (1993) 15 Cal.App.4th 1611, 1621-1622.)
"The test commonly employed in determining the adequacy of the pleading of demand futility was enunciated by the Delaware Supreme Court in Aronson v. Lewis (Del. 1984) 473 A.2d 805 (Aronson). The court there observed that 'the entire question of demand futility is inextricably bound to issues of business judgment and the standards of that doctrine's applicability." [Citation.] Aronson held that a court, in deciding whether a plaintiff will be excused from making a demand on the board, must evaluate 'whether, under the particularized facts alleged, a reasonable doubt is created that: (1) the directors are disinterested and independent and (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.' [Citations.] '[F]utility is gauged by the circumstances existing at the commencement of a derivative suit.' [Citation.] And the two-prong test under Aronson is disjunctive; accordingly, there is demand excusal if either prong is satisfied." (Bader, supra, 179 Cal.App.4th at pp. 790-791, fns. omitted; see Oakland Raiders v. National Football League (2001) 93 Cal.App.4th 572, 587.)
"[A]lthough the Aronson two-prong standard is well suited to actions challenging conscious decisions by boards to act or refrain from acting, the business judgment rule (and hence the test in Aronson) could not be applied where there was no board action . . . . [Citation.] In those instances, the court inquires 'whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Thus, a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand.'" (Bader, supra, 179 Cal.App.4th at pp. 791-792; see Leyte-Vidal v. Semel (2013) 220 Cal.App.4th 1001, 1010.) We apply the Aronson test in this case because the lawsuit challenges conscious decisions by the entity that controls the limited partnership, but our analysis and the outcome would be the same if we applied this alternative test.
"A director will be deemed not to be disinterested if the facts alleged 'demonstrat[e] a potential personal benefit or detriment to the director as a result of the decision.' [Citations.] The personal benefit must arise out of the transaction being challenged. . . . [W]here there is a showing that a director is not disinterested, and the transaction has not been approved by a majority of directors, the business judgment rule does not come into play; demand futility is established." (Bader, supra, 179 Cal.App.4th at p. 792.)
"The derivative plaintiff seeking to excuse demand based upon a director's lack of independence must allege specific facts that cast doubt as to ' whether the director's decision is based on the corporate merits of the subject before the board, rather than extraneous considerations or influences.' [Citation.] Such lack of independence may be demonstrated by specific facts 'showing that the director is "beholden" to an interested director or officer, "or so under their influence that their discretion would be sterilized." [Citation.]' . . . And in this context, simple allegations, of themselves, that a director has a personal friendship or outside business relationship with the controlling person will not suffice to cast a reasonable doubt as to the director's independence." (Bader, supra, 179 Cal.App.4th at p. 792.)
"A 'mere threat of personal liability for approving a questioned transaction' by itself is insufficient to refute the disinterestedness or independence of a director. [Citation.] Therefore, '[a] plaintiff may not "bootstrap allegations of futility" by pleading merely that "the directors participated in the challenged transaction or that they would be reluctant to sue themselves." [Citation.]' [Citation.] In that vein, the fact that the board approved the challenged transaction, of itself, does not establish demand futility under the theory that such approval 'automatically connotes "hostile interest" and "guilty participation" by directors.' [Citation.] To hold otherwise would eviscerate the demand requirement entirely." (Bader, supra, 179 Cal.App.4th at pp. 792-793.)
A limited partner lacks standing to bring a derivative lawsuit if the partner fails to allege compliance with the prefiling demand requirement or particularized facts showing a demand would have been futile. (Bader, supra, 179 Cal.App.4th at p. 793.)
2. The Parties' Contentions and the Complaint's Allegations
The trial court sustained Defendants' demurrer to the entire third amended complaint on the ground Plaintiffs failed to allege particularized facts establishing demand futility. Plaintiffs contend the court erred because they alleged detailed facts showing it would have been futile to make a prefiling demand on Colton and McClintock based on their ownership and control of the Colton Company and Colton Capital, and their use of those entities to commit the alleged wrongdoings. In response, Defendants contend Plaintiffs' ownership and control allegations are nothing but bare conclusions, and Plaintiffs failed to allege specific facts showing Colton and McClintock lacked sufficient disinterestedness and independence to render making a prefiling demand on them futile. All of these contentions, however, erroneously focus on Colton and McClintock. The proper inquiry focuses on the Colton Company and whether it lacked sufficient objectivity and independence to make a prefiling demand futile. We conclude the complaint alleges particularized facts establishing demand futility when those allegations are reviewed with the Colton Company in mind.
As explained above, Corporations Code section 15910.02 requires a limited partner to make a demand on a limited partnership's general partners before filing a derivative lawsuit on the partnership's behalf because the general partners possess the exclusive authority to manage the partnership's business, including the decision whether to pursue litigation. (See Bader, supra, 179 Cal.App.4th at pp. 787-788.) A futile prefiling demand on the general partner may be excused, but the limited partner's complaint must state with particularity why a prefiling demand would have been futile. (Corp. Code, §§ 15910.02, 15910.04.)
Here, the Provider Fund's only general partner is the Colton Company, and therefore Plaintiffs had to make a prefiling demand on the Colton Company or allege particularized facts showing why demand on the Colton Company would have been futile. (Corp. Code, §§ 15910.02, 15910.04.) As a corporation, the Colton Company is a distinct legal entity, separate from its shareholders, officers, and directors. (Twenty-Nine Palms Enterprises Corp. v. Bardos (2012) 210 Cal.App.4th 1435, 1450; Say & Say, Inc. v. Ebershoff (1993) 20 Cal.App.4th 1759, 1767.) Although the Colton Company may act only through its officers, directors, and agents (Creative Ventures, LLC v. Jim Ward & Associates (2011) 195 Cal.App.4th 1430, 1443; Foreman Roofing, Inc. v. United Union of Roofers etc. Workers (1983) 144 Cal.App.3d 99, 107-108), it nonetheless remains a separate legal entity. We therefore must examine the complaint to determine whether Plaintiffs alleged particularized facts showing the Colton Company lacked the independence and disinterestedness required to fairly evaluate the challenged transactions. (Bader, supra, 179 Cal.App.4th at p. 790.)
As modified to apply in the limited partnership context, the Aronson test provides that a complaint adequately alleges demand futility when its particularized facts create a reasonable doubt that either the general partner is disinterested and independent, or the challenged transactions were otherwise the product of the general partner's reasonable business judgment. (Bader, supra, 179 Cal.App.4th at pp. 790-791.) A plaintiff alleges a lack of independence sufficient to establish demand futility when the particularized facts cast doubt on whether the general partner's decision to approve or allow the challenged transactions was based on the merits of the transactions rather than extraneous considerations or influences. (Id. at p. 792.)
Here, Plaintiffs' 83-page complaint is highly redundant and full of conclusory allegations about "Defendants" taking various actions without specifying which Defendant actually took the action. The complaint repeatedly alleges the conclusion that Defendants are liable as participants, aiders and abettors, conspirators, joint venturers, agents, and alter ego of one another without providing any facts to support that allegation. But intertwined with these improper conclusory allegations, the complaint also includes allegations the Colton Company breached its fiduciary duties to the Provider Fund in numerous ways, including paying Colton Capital various commissions and allowing different charges that either were not authorized by the Provider Fund's governing documents or exceeded the amount allowed by those documents.
The complaint specifically identifies dozens of transactions that it alleges were improper, but a couple of examples suffice to show demand futility. First, the complaint specifically identifies nine deferred real estate commissions the Colton Company caused or allowed the Provider Fund to pay Colton Capital that were not authorized by the Provider Fund's governing documents. Similarly, the complaint specifically identifies 24 leasing commissions the Colton Company caused or allowed the Provider Fund to pay Colton Capital that exceeded the amount authorized under the Provider Fund's governing documents. The complaint further alleges the Colton Company and Colton Capital are related entities that are both wholly owned by Colton and that both have Colton and McClintock as their only officers and directors.
Read in its entirety, the complaint's particularized facts create a reasonable doubt concerning whether the Colton Company approved or allowed these transactions based on their merits rather than extraneous considerations or influences. (See Bader, supra, 179 Cal.App.4th at p. 792.) Indeed, significant doubt about a general partner's independence arises when the alleged facts show the general partner caused or allowed the partnership to make unauthorized payments to an entity that has the identical ownership and management as the general partner. We therefore conclude Plaintiffs adequately alleged demand futility when the complaint's allegations are examined with an eye toward determining whether the Colton Company, rather than Colton and McClintock, lacked the necessary disinterestedness and independence.
As the foregoing analysis demonstrates, Plaintiffs' allegations that Colton is the Colton Company's sole shareholder, and Colton and McClintock are the Colton Company's only officers and directors, are properly considered as factors in deciding whether Plaintiffs adequately alleged demand futility. Those allegations, however, do not change the governing standard: whether the Colton Company as the Provider Fund's only general partner lacked the necessary disinterestedness and independence. The interests of Colton and McClintock as the Colton Company's sole shareholder and officers are considered only for their impact on the Colton Company's interests and independence. C. Plaintiffs Failed to Allege a Breach of Fiduciary Duty Claim Against Any Defendant Other Than the Colton Company
Among the Complaint's many boilerplate allegations are allegations that all Defendants are the alter ego of one another and that the individuality and separateness of the individuals and entities is nonexistent. These allegations fail to state a claim that Colton and McClintock are the Colton Company's alter ego. (Moore v. Regents of University of California (1990) 51 Cal.3d 120, 134, fn. 12 (Moore); Leek v. Cooper (2011) 194 Cal.App.4th 399, 415 ["An allegation that a person owns all of the corporate stock and makes all of the management decisions is insufficient to cause the court to disregard the corporate entity"].) We therefore need not address whether adequate alter ego allegations would shift the focus of the demand futility analysis from the Colton Company's disinterestedness to the disinterestedness of Colton and McClintock.
The trial court sustained the demurrer to Plaintiffs' breach of fiduciary duty claim for all Defendants except the Colton Company on the ground that no other Defendant owed the Provider Fund a fiduciary duty, and Plaintiffs failed to allege facts showing the other Defendants were vicariously liable for the Colton Company's alleged breach of its duties. Plaintiffs contend the trial court erred because they alleged sufficient facts to state this claim against all Defendants on three separate theories. We find no merit to these theories.
The Colton Company did not challenge the breach of fiduciary duty claim.
First, Plaintiffs contend the other Defendants owed fiduciary duties to the Provider Fund because they were owners and officers of the Colton Company or benefitted from the Colton Company's breach of the fiduciary duties it owed the Provider Fund. Not so. The first element of any claim for breach of fiduciary duty is the existence of a fiduciary relationship between the plaintiff and the defendant. (Thomson v. Canyon (2011) 198 Cal.App.4th 594, 604.) "A fiduciary relationship is '"any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter's knowledge or consent. . . ."'" (Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 29.)
Plaintiffs do not allege facts showing the Provider Fund had a relationship with any Defendant, other than the Colton Company, in which the fund reposed confidence in the Defendant and the Defendant accepted or assumed that confidence. Indeed, Plaintiffs failed to allege a direct relationship between the Provider Fund and any Defendant other than the Colton Company. Plaintiffs also fail to cite any authority that supports their contention these other Defendants owed fiduciary duties to the Provider Fund because they were somehow related to the Colton Company.
Second, Plaintiffs contend Colton is collaterally estopped to deny he owed the Provider Fund fiduciary duties because a judgment in a separate action, which we upheld in an unpublished decision, found that Colton owed the Provider Fund fiduciary duties. But Plaintiffs did not allege this theory in the complaint. Indeed, the complaint does not mention collateral estoppel, identify the other lawsuit, or otherwise allege facts to support this theory. (See Rossberg, supra, 219 Cal.App.4th at p. 1487, fn. 3.) We nonetheless revisit this contention below in the context of whether we should grant Plaintiffs leave to amend their complaint.
Finally, Plaintiffs contend they adequately alleged a breach of fiduciary duty clam against these Defendants on the theory the Defendants are liable because they aided and abetted the Colton Company's breach of the fiduciary duties it owed the Provider Fund. Plaintiffs also failed to allege sufficient facts to support this theory.
"A defendant is liable for aiding and abetting another in the commission of an intentional tort, including a breach of fiduciary duty, if the defendant '"'knows the other's conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act.'"' [Citation.] The elements of a claim for aiding and abetting a breach of fiduciary duty are: (1) a third party's breach of fiduciary duties owed to plaintiff; (2) defendant's actual knowledge of that breach of fiduciary duties; (3) substantial assistance or encouragement by defendant to the third party's breach; and (4) defendant's conduct was a substantial factor in causing harm to plaintiff." (Nasrawi v. Buck Consultants LLC (2014) 231 Cal.App.4th 328, 343.) Unlike liability for a civil conspiracy, a defendant may be liable for aiding and abetting the breach of a fiduciary duty even though the defendant did not itself owe that duty to the plaintiff. (American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225 Cal.App.4th 1451, 1476.)
To support their aiding and abetting theory, Plaintiffs rely on the allegations in their complaint under the heading, "Aiders, Abettors, Agents and Co-Conspirators." In this section, Plaintiffs simply allege Defendants "are also sued as . . . aiders and abettors . . . and the liability of each arises from the fact that each has, with intent and knowledge engaged in all or part of the improper acts, plans, schemes, or transactions to participate, induce, or carry out the scheme causing Plaintiffs' harm." These conclusory allegations, however, are insufficient to support this theory. (Moore, supra, 51 Cal.3d at p. 134, fn. 12.) Moreover, Plaintiffs fail to cite any allegations that identify an act that any specific Defendant performed that assisted or encouraged the Colton Company to breach its fiduciary duty, or even an allegation to show that any particular Defendant had actual knowledge of any specific breach of duty by the Colton Company. (See Casey v. U.S. Bank Nat. Assn. (2005) 127 Cal.App.4th 1138, 1152 ["the complaint must allege the defendant's actual knowledge of the specific breach of fiduciary duty for which it seeks to hold the defendant liable"].) Although Defendants pointed out these failures in their brief, Plaintiffs failed to address this cause of action in their reply brief.
At oral argument, Plaintiffs argued paragraph 34 of their complaint adequately alleged Colton Capital owed the Provider Fund fiduciary duties because it performed the property management function for the Provider Fund's properties. This argument fails for two reasons. First, Plaintiffs did not make the argument in their briefs. (Collins v. Navistar, Inc. (2013) 214 Cal.App.4th 1486, 1508, fn. 8 ["arguments may not be raised for the first time at oral argument"].) Second, the argument fails on its merits. Paragraphs 34 and 61 of the complaint acknowledge the Provider Fund's governing documents designated the Colton Company as the property manager and the Provider Fund had no contractual or other direct relationship with Colton Capital. These paragraphs allege the Colton Company "delegated" its property management obligations to Colton Capital. Colton Capital therefore may have owed the Colton Company fiduciary duties based on that delegation, but Plaintiffs cite no authority showing those duties followed through the Colton Company to the Provider Fund when there was no direct relationship between Colton Capital and the Provider Fund. D. Plaintiffs Failed to Allege an Unfair Competition Claim Against Any Defendant
"The California Unfair Competition Law (UCL) (§ 17200) defines '"unfair competition" as "any unlawful, unfair or fraudulent business act or practice and unfair, deceptive, untrue or misleading advertising."' [Citation.] A UCL action '"is not an all-purpose substitute for a tort or contract action." [Citation.] Instead, the act provides an equitable means through which both public prosecutors and private individuals can bring suit to prevent unfair business practices and restore money or property to victims of these practices. . . ."' . . . [¶] Because the statute '"is written in the disjunctive, it establishes three varieties of unfair competition—acts or practices which are unlawful, or unfair, or fraudulent."'" (Graham v. Bank of America, N.A. (2014) 226 Cal.App.4th 594, 609-610 (Graham).) Plaintiffs contend they alleged a claim under each of these three prongs, but we conclude the complaint's allegations failed to state a claim.
The unlawful practices prong "'"borrows" violations of other laws and treats them as unlawful practices' that the unfair competition law makes independently actionable." (Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180; see Graham, supra, 226 Cal.App.4th at p. 610.) "Thus, a violation of another law is a predicate for stating a cause of action under the UCL's unlawful prong." (Berryman v. Merit Property Management, Inc. (2007) 152 Cal.App.4th 1544, 1554.) The plaintiff's complaint must identify a specific statute, regulation, or other law the defendant allegedly violated, and allege facts stating every element necessary to establish a violation of that statute, regulation, or law. (People v. McKale (1979) 25 Cal.3d 626, 635; Berryman, at p. 1554; Khoury v. Maly's of California, Inc. (1993) 14 Cal.App.4th 612, 619.)
Plaintiffs contend they stated a claim under the unlawful practices prong by "alleg[ing] numerous unlawful business acts under Civil Code section[s] 1572, [1573, 1709, and 1710]." Theses statutes define common law fraud or deceit, including actual fraud, constructive fraud, and concealment. The complaint, however, does not identify any of these statutes. Moreover, Plaintiffs failed to allege facts establishing every element necessary to state a claim for fraud or concealment. This is a derivative lawsuit Plaintiffs brought on the Provider Fund's behalf; they do not allege an individual claim in their own names. To state a claim for fraud or concealment, Plaintiffs must identify a specific fact that a particular Defendant misrepresented or failed to disclose to the Provider Fund, and the Provider Fund relied on that fact to its detriment. The complaint includes no such allegations, and therefore Plaintiffs failed to state a claim for unlawful business practices. (See Graham, supra, 226 Cal.App.4th at p. 610 ["defendants cannot be held liable for unlawful business practices where there is no violation of another law"].)
"'"The 'fraud' prong of [the UCL] is unlike common law fraud or deception. A violation can be shown even if no one was actually deceived, relied upon the fraudulent practice, or sustained any damage. Instead, it is only necessary to show that members of the public are likely to be deceived." [Citations.]'" (Buller v. Sutter Health (2008) 160 Cal.App.4th 981, 986 (Buller).) When the claim is based on a failure to disclose rather than a misrepresentation, the plaintiff must allege facts establishing a duty to disclose the withheld fact. "This is because a consumer is not 'likely to be deceived' by the omission of a fact that was not required to be disclosed in the first place." (Id. at p. 987.)
Plaintiffs contend they stated a claim under the fraudulent practices prong by simply incorporating their argument concerning the unlawful practices prong: "With respect to the . . . fraudulent practices, the allegations above for unlawful practice also suffice." No, they do not. On the unlawful practices prong, Plaintiffs contend they adequately stated a claim by alleging common law fraud, constructive fraud, and concealment. Not only did Plaintiffs fail to allege facts stating any of those claims, but they also fail to recognize that the fraudulent business practices prong is unlike common law fraud and requires different allegations to state a claim. (Buller, supra, 160 Cal.App.4th at p. 986; Searle v. Wyndham Internat., Inc. (2002) 102 Cal.App.4th 1327, 1335 ["'[t]he "'fraud' contemplated by section 17200's third prong bears little resemblance to common law fraud or deception. The test is whether the public is likely to be deceived"'"].)
Plaintiffs do not acknowledge the likelihood-the-public-will-be-deceived standard, and make no attempt to explain how the complaint alleged facts to satisfy that standard. Our independent review of the complaint reveals no such allegations, and we nonetheless decline to make an argument on this issue for Plaintiffs. (Niko v. Foreman (2006) 144 Cal.App.4th 344, 368 ["'This court is not inclined to act as counsel for . . . appellant and furnish a legal argument as to how the trial court's rulings . . . constituted [error]'"].) Plaintiffs failed to state a claim under the fraudulent practices prong.
For similar reasons, Plaintiffs also failed to state a claim under the UCL's unfair practices prong. The standard for determining what constitutes an unfair practice remains unsettled in actions brought by consumers such as Plaintiffs. (Graham, supra, 226 Cal.App.4th at p. 612.) California appellate courts have adopted three different definitions for defining an unfair business practice or act in consumer cases, and that conflict has not been resolved. (Id. at pp. 612-613.) Plaintiffs fail to identify any of the three possible definitions, let alone argue which one we should apply or why the complaint's allegations satisfy any possible definition. Plaintiffs therefore failed to meet their burden to establish error by showing how the facts alleged in their complaint are sufficient to establish every element of this claim. (Rossberg, supra, 219 Cal.App.4th at pp. 1490-1491.) E. Plaintiffs Failed to Allege an Accounting or Declaratory Relief Claim Against Any Defendant Other Than the Colton Company
The trial court sustained the demurrer on the accounting and declaratory relief claims for all Defendants except the Colton Company on the ground these claims "rely on the viability of the first and second causes of action for their own viability," and therefore failed to state a claim because the first two causes of action failed to state a claim. Building on this logic, Plaintiffs contend they adequately alleged their breach of fiduciary duty and unfair competition claims, and therefore they also adequately alleged their accounting and declaratory relief claims. As explained above, we conclude Plaintiffs failed to state a breach of fiduciary duty claim against any Defendant other than the Colton Company and failed to state an unfair competition claim against any Defendant. Plaintiffs therefore did not state an accounting or declaratory relief claim against any Defendant other than the Colton Company. F. Plaintiffs Fail to Show the Trial Court Abused Its Discretion By Denying Leave to Amend
Plaintiffs contend the trial court abused its discretion in denying them leave to amend, but they fail to provide an explanation how they could amend their complaint to overcome the defects discussed in this opinion. As explained above, a plaintiff may not assert an abstract right to amend; rather, a plaintiff must specify the additional facts it would allege and explain how those facts are sufficient to state a cause of action under the controlling legal authority. (Rosen, supra, 193 Cal.App.4th at p. 458.) Plaintiffs failed to do so, and therefore failed to establish an abuse of discretion. (Id. at p. 464; Rakestraw v. California Physicians' Service (2000) 81 Cal.App.4th 39, 53 [no abuse of discretion in denying leave to amend when appellants failed to "provide[] adequate legal authority or factual allegations . . . to satisfy their burden of showing that there is a reasonable possibility that they can amend the legal effect of their complaint"].)
Although they do not specifically request leave to amend to allege facts regarding an earlier lawsuit Colton brought against two Provider Fund investors, Plaintiffs request that we judicially notice the trial court's judgment and our opinion in that lawsuit. (See Colton v. Pekarcik (Jan. 28, 2015, G048830 [nonpub. opn.] (Pekarcik).) As explained above, Plaintiffs contend they stated a breach of fiduciary duty claim against Colton individually because he is collaterally estopped to deny he owes the Provider Fund fiduciary duties based on our decision in Pekarcik. We reject that argument because Plaintiffs' complaint includes no allegations about Pekarcik or the collateral estoppel theory Plaintiffs now argue. We nonetheless consider whether Plaintiffs should be granted leave to amend to allege facts to support that theory.
In Pekarcik, Colton sued to specifically enforce an agreement he reached to purchase the limited partnership interests of two share investors in the Provider Fund. We affirmed the trial court's judgment denying Colton specific performance on numerous grounds, including that "Colton breached his fiduciary duty to disclose all material information about the value of [the defendant investors'] shares." (Pekarcik, supra, G048830, at p. *12.) Plaintiffs contend the trial court judgment and our decision in Pekarcik establish Colton owed the Provider Fund fiduciary duties, and therefore Colton is collaterally estopped to deny he owed those duties in this lawsuit. We deny Plaintiffs' judicial notice request, and find no abuse of discretion in the trial court denying Plaintiffs leave to amend, because Pekarcik did not address whether Colton owed the Provider Fund fiduciary duties, and therefore collateral estoppel does not apply.
"'Collateral estoppel precludes relitigation of issues argued and decided in prior proceedings. [Citation.] Traditionally, we have applied the doctrine only if several threshold requirements are fulfilled. First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.'" (Hernandez v. City of Pomona (2009) 46 Cal.4th 501, 511 (Hernandez).) The party asserting collateral estoppel bears the burden to establish each of these elements. (Lucido v. Superior Court (1990) 51 Cal.3d 335, 341.)
"For purposes of collateral estoppel, an issue was actually litigated in a prior proceeding if it was properly raised, submitted for determination, and determined in that proceeding. . . . 'The "identical issue" requirement addresses whether "identical factual allegations" are at stake in the two proceedings, not whether the ultimate issues or dispositions are the same. [Citation.]'" (Hernandez, supra, 46 Cal.4th at pp. 511-512.)
Here, the relevant issue is whether Colton as an individual owes the Provider Fund fiduciary duties. That was not an issue in Pekarcik. There, the issue was whether Colton owed fiduciary duties to two share investors to whom he made an offer to purchase their interests. Neither the trial court nor this court decided whether Colton owed the Provider Fund fiduciary duties because that was not an issue in the case. (Pekarcik, supra, G048830, at p. *12 & fn. 4.)
III
DISPOSITION
The judgment is reversed in part and affirmed in part. The judgment is reversed as to all claims against the Colton Company except the second cause of action for unfair business practices; the judgment is affirmed on that cause of action as to the Colton Company. The judgment also is affirmed on all causes of action as to all Defendants other than the Colton Company. In the interest of justice, all parties shall bear their own costs on appeal.
ARONSON, ACTING P. J. WE CONCUR: FYBEL, J. IKOLA, J.